Economic commentary from David Oser, formerly chief economist at ShoreBank

May 08, 2012

Gains & Losses

By now, everyone is aware of that most publicized, and most politicized, of economic statistics: payroll employment in the United States rose by 115,000 in April. This does not mean that the economy simply added a total of 115,000 jobs; rather, it means that some very large number of new jobs and some very large number of lost jobs netted to an increase of 115,000. Figuring out those two large numbers is much harder and takes much longer than simply noting the net change.

On May 1, the Bureau of Labor Statistics, that great storehouse of useful information, released its most recent count of job gains and losses. It is a mark of difficulty that the "most recent period" is the third quarter of 2011. The chart below summarizes the data. The gray bars show periods of recession, the blue line tracks job gains and the red line, job losses. At this high level, the picture is clear: In bad times more jobs are lost; in good times more jobs are gained.

From the beginning of 2001 through the third quarter of 2011, the economy created 316 million jobs and lost 319 million. These are both astonishingly large and astonishingly close numbers. To put it in perspective, 2.4 jobs were created and 2.4 jobs lost for every American currently employed, a demonstration, apparently, of tremendous mobility and vitality in the economy. But the details show a more nuanced picture. In the recession years of 2001 and 2008-09, job losses exceeded job gains by 12.1 million. In contrast, during the three boom years, 2004-06, job gains exceeded job losses by only 6.0 million. Bad times have been considerably worse than good times have been good.

Looking even closer, we find that both job creation and job destruction have slowed dramatically over the past decade. The vertical axis on the chart at left adds together jobs created and destroyed. The red line tracks the changes in the total in each year from 2001 to 2011, what one might call job volatility. As you can see, job volatility declined sharply during and immediately after the 2001 recession. It evened out during the mid-decade boom, but dropped again in the Great Recession. It is leveling off in the present recovery but at a much lower level.

I suspect this trend is related to and reflects the decline in the labor participation rate. The last chart shows the percentage of Americans over age 16 in the labor force over the last 10 years. The drop, from nearly 67% to 63.5% has been drastic. Of course, every person who stops looking for a job has his or her own reasons, but individual circumstances should not blind us to a central fact: fewer Americans have to work to provide all the goods and services we need. Indeed, fewer Americans have to work to keep the US economy the strongest in the world.

Economists have a typically cold-blooded term for describing this phenomenon: the Non-Accelerating Inflation Rate of Unemployment or NAIRU (pronounced like the former Indian prime minister). It means that in order for the economy to adjust dynamically to changing demand, technologies, and competition, some fairly significant percentage of would-be employees will always be out of work. Employees are the economy's unwilling elastic.

In one sense NAIRU is an obvious concept. Its alternative is a command economy in which people have jobs for life, few businesses are created and fewer still are allowed to die. It's an approach that has been tried and found wanting. As factory hands in the old Soviet Union used to say, "We pretend to work and they pretend to pay us." The problem, though, is that nobody knows what the lowest sustainable rate of unemployment actually is. Economists tend to come to the ex post facto conclusion that NAIRU is simply the current unemployment rate. In the boom periods of the 1990s, they were saying that the NAIRU may be as low as 4-5%; now they are saying it may be 7-8%.

This is more than an academic exercise. If an ever smaller proportion of Americans has to work, how will the growing number of non-workers live? In my opinion, this will be the great social and political question of the next 50 years. If addressed constructively, it will result in a redefinition of usefulness and productivity. If ignored, it will perpetuate an underclass whose hopes for a better life will be blighted from birth.

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Recommended Reading

David Deutsch: The Beginning of Infinity: Explanations That Transform the WorldWith the possible exception of Ray Kurzweil's The Singularity Is Near, this is the most optimistic book I have ever read. If you choose to read the book, you will understand, among much else, what optimism really is. But, I have to warn you, the book is long and very difficult, being a combination of quantum physics and philosophy. I would not suggest it, if I didn't think it was extremely important, and, especially for younger persons, life-changing and life-affirming in the best senses of those over-used terms.

Liaquat Ahamed: Lords of Finance: The Bankers Who Broke the WorldThis a must-read for anyone interested in history and economics. Ahamed's history is sound and his analysis of how people--even experts--really make economic decisions is exactly on the mark.